BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE:  February 27, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: SFC Substitute for SB - 815

SPONSOR: Senate Finance Committee

BILL SHORT TITLE: Gross Receipts Tax Deduction for Federal Research and Development Services

CONFLICTS, DUPLICATES, COMPANIONS: This bill has similar constituency to SB-288 Technology Startup Tax Credit and to the existing Technology Jobs Tax Credit bill, enacted last year. 

DESCRIPTION: This bill provides a gross receipts tax deduction for receipts from a federal agency for performing research and development services other than at Sandia or LANL.

EFFECTIVE DATE: July 1, 2001

FISCAL IMPACT (Thousands of dollars):  		Note: Parenthesis ( ) indicate a revenue loss:
		Recurring or		
	Estimated Impact on Revenues	Nonrecurring	Funds 	
	  FY 2002 	  Full Year r   	     Impact     t     	             Affected         .             	
	(3,000)	(3,300)	Recurring	General Fund	
	(2,300)	(2,500)			

The 1997 New Mexico Economic Census reports for NAICS 5417 -- Scientific research & development services – 112 establishments, with 9,872 employees, $533,370,000 in payroll and $1,442,471,000 in total gross receipts. This presumably includes Sandia National Laboratory, excluded from the benefits of this bill. Assume 80% of the private R & D receipts are from federal sources, 50% taxable, 7,374 employees at Sandia National Lab (www.sandia.gov) and the same ratio of gross receipts to employees. Further allow some growth to achieve a base for this bill of $163M.  Part of the effect of this bill may be to shift taxability, rather than eliminate taxability.  See “OTHER IMPACTS AND ISSUES” item #3.

ADMINISTRATIVE IMPACT: Minimal for processing and systems. Forms, instructions and taxpayer seminar material will have to be adapted.

TECHNICAL ISSUES: Article IV, Section 15 of the New Mexico Constitution provides, “No law shall be passed except by bill, and no bill shall be so altered or amended on its passage through either house as to change its original purpose.” There is little case law on this point. In particular there has been no litigation on the use or  propriety of using dummy bills to enact substantive legislation. This bill was originally filed as a “dummy bill”, with no substantive content, and a title that reads, “for the public peace, health, safety and welfare”. The substitute bill is substantive and necessarily goes far beyond “broadening the act and making it more comprehensive as to details” because the original bill had no content. This standard was determined in Black Hawk Consolidated Mines Co. V. Gallegos, 52 NM 74, 191 P.2d 996 (1948). The constitutionality of the entire act is thus suspect, no matter how well intentioned.

OTHER IMPACTS AND ISSUES:
1.	Data gathered for SB-288 indicates that New Mexico has over 110 research and development companies that employ fewer than 50 employees. Few, if any, of these firms have revenue in excess of $10 million. 

2.	Unlike other bills dealing with taxation of research and development, this does not appear to be a private sector economic development bill. The federal government, through Sandia consolidators and lab contract specialists, chooses contractors based on competence and generally reimburses the firms for their gross receipts tax. If the deduction is passed, the main beneficiary appears to be the federal government, which will no longer reimburse the gross receipts tax of the contract firms. It is then speculative how the federal establishment will spend the savings.

3.	Apparently, this deduction applies only to receipts received directly from the federal agency.  Subcontractor’s receipts from a primary contractor are not covered.  Thus, if the prime’s receipts are no longer taxable by virtue of their new deduction, the prime may no longer execute a type 5 nontaxable transaction certificate with the subcontractor, making the subcontractor’s receipts taxable, whereas under current law the receipts would be deductible.